Unlike in district court where depositions play an integral role in litigation, depositions in Tax Court occur with much less frequency. The Tax Court recently issued an order allowing the IRS to take the depositions of two witnesses via Zoom in the case of Oconee Landing Property, LLC et al v. Commissioner, Dk. No. 11814-19 (Nov. 8, 2021). Since these orders do not come along very often and we have never blogged about depositions in Tax Court, this presents a good opportunity to discuss the issue.
In almost 45 years of practice before the Tax Court, I have never taken a deposition. When I worked for Chief Counsel, I was deposed a couple of times in non-Tax Court cases and I have been deposed once since becoming a clinician, but that was because I was serving as an expert witness. So, my knowledge of depositions is low. In addition to never conducting a deposition, I do not remember any member of my office taking a deposition in a Tax Court case. Depositions may have become more frequent since I left Chief Counsel, but I am not convinced that they have. In an earlier era, it was almost impossible to get one authorized unless you could show the person to be deposed was going to become unavailable, usually because of impending death. The Tax Court rules have loosened up over the years, allowing depositions in other situations, but the general default is to stipulate rather than to build the case through depositions as would occur in a district court case.
Tax Court Rules
The Tax Court has several rules that address depositions:
Title VII Discovery
Rule 74 – Depositions for Discovery Purposes: This rule provides in subsection (b) that a party can take a deposition with the consent of all parties. Basically, the same group agreement that governs the stipulation process. The rule contains several sub-rules requiring proof of the agreement and other steps that must be taken. Subsection (c) allows a party to take a deposition without consent. This can only happen after the case is set for trial or assigned to a specific judge. The rule puts restrictions on the situation in which it can occur and provides that taking such a deposition is an extraordinary method of discovery. The rule sets out the steps the party must take in order to take someone’s deposition and provides a procedure for another party to object.
Title VIII Depositions to Perpetuate Evidence
Rule 80 – General Provisions: The general provision essentially says to comply with the other paragraphs of this title to the Rules
Rule 81 – Depositions in Pending Cases: The person seeking to take the deposition must file a detailed application, including the questions to be asked if it is a written deposition. This rule is quite long and contains a process by which the parties can stipulate to an agreement to take the deposition and it covers video recorded depositions.
Rule 82 – Depositions Before Commencement of Case: Taking the deposition requires making an application to the court setting out why you want to do it and alerting the parties that the Tax Court can hold a hearing before it allows the deposition.
Rule 83 – Depositions After Commencement of Trial: Short and sweet rule that says it’s possible to do this if the court finds it appropriate.
Rule 84 – Depositions Upon Written Questions: Seems a lot like interrogatories to a single individual. Requires an application to the court attaching the questions.
Rule 85 – Objections, Errors, and Irregularities: Liberally allows fixing problems if something goes wrong with deposition in the nature of a foot fault.
The Specific Effort to Depose
The case in which the IRS requested the opportunity to take depositions is a conservation easement case. The IRS seeks to depose James and Mercer Reynolds using the procedures established in Rule 74(c), which creates the most difficult test for the party seeking to take the deposition to overcome.
The property subject to the easement was acquired by the Reynoldses in November 2003. They held the property until 2014, when they contributed it to Carey Station, LLC (CS), in exchange for membership interests in CS, of which they effectively owned 100%.
On December 21, 2015, CS contributed the property to Oconee in exchange for a 99% membership interest in Oconee. Two days later, petitioner purchased a 97% interest in Oconee from CS for $2,440,000. The same day, petitioner made a $1.3 million cash contribution to Oconee.
Eight days later, on December 31, 2015, Oconee donated a conservation easement over the property to the Georgia Alabama Land Trust. The deed of easement was recorded the same day. Oconee at that point was owned 97% by petitioner, 2% by CS, and 1% by Carey Station Manager, LLC.
Oconee timely filed Form 1065, U.S. Return of Partnership Income, for its 2015 tax year. On that return it claimed a charitable contribution deduction of $20,670,000 for its donation of the conservation easement.
The IRS disallowed the claimed charitable contribution deduction, issued a final partnership administrative adjustment (FPAA) and petitioners filed in Tax Court contesting the disallowance and allowing all of us to see their tax situation.
The IRS attorney asked if the Reynoldses would participate in a “transcribed informal interview.” They declined. The IRS attorney then sent the Reynoldses notices of deposition and subpoenas to which they objected and which form the basis for this order. The IRS relies on Tax Court Rule 74(c), which provides that the taking of a deposition of a non-party witness is an extraordinary method of discovery. The rule permits it when the testimony sought is relevant, the testimony is not privileged and the testimony cannot be obtained informally – back to the Tax Court’s preference for cooperation among parties.
The court finds that the Reynoldses have relevant information that is not privileged. As the owners of the property for 10 years prior to the multiple transfers at the end of 2015, the court presumed they participated in the negotiations leading to the transfer and that they would know whether the purchase was arm’s length. I am not reading all of the responses filed in this case so I cannot say with certainty why the Reynoldses would not cooperate informally. They may not have the same incentive to get to the right tax answer that the government should have. The court notes that in addition to providing information regarding the value of the property, they could also provide background regarding prior efforts to sell the property.
Basically, the Reynoldses seemed to say that the IRS was not trying hard enough to get the information it wanted from them informally. The court found that their rebuff of the IRS request to informally sit down and talk in a transcribed interview opened the door to the deposition request, even pointing out that the IRS did not ask that the interview be conducted under oath. In effect, though the Court does not cite to this case, the IRS met its Branerton responsibility with the informal request. The Reynoldses counter that responding to the deposition will be unduly burdensome and expensive. The court doesn’t mention that they should be good for some attorney’s fees based on the benefit from the conservation easement but instead points out that the deposition will take place over Zoom, cutting their cost and time to attend.
I am not sympathetic with the Reynoldses and perhaps that colors my view of their arguments. If they want the IRS and the court to be able to get to the bottom of their tax issue, an issue they created and a petition they filed, they should cooperate in providing information. Perhaps they are concerned that the more the IRS and the court know about the details of the conservation easement, the less likely they will walk away from the Tax Court case with the claimed benefits. Kudos to the Chief Counsel attorneys for trying to gather this information which will assist in better framing the case for the court.
A case like this seems to make it easy for the Tax Court to order depositions, but the relative ease with which Judge Lauber gets to what seems to be the obviously right conclusion is not necessarily the norm in Tax Court. Because the Tax Court has a long history of being reluctant to grant depositions, I am not surprised that the Reynoldses make these arguments. As I said at the start, my knowledge of depositions in the Tax Court is limited and not first-hand knowledge. I hope that the outcome here has become or will become normative. The information is needed, though it’s easy to understand why the Reynoldses may not want to provide it.